Introduction:
High-Deductible Health Plans (HDHP) coupled with Health Savings Accounts (HSAs) are the only health plans offered by around 40 percent of employers. This combination can reduce premiums, provides a saving in taxes, incentivizes some people to save on health care, and creates a potential new source of savings for retirement.
This type of health insurance arrangement also creates health and financial tradeoffs, which are most severe for low-income and mid-income households.
- HDHPs and HSAs often incentivize people to forego necessary health care procedures and regimens. Studies have shown financial factors result in a lower utilization of prescription drugs for chronic health conditions,
- The existence of HSAs to fund high deductibles causes some people to choose between funding their HSA or funding their 401(k) plan,
- Some young healthy adults paying the full premium on their health plan may choose to go uninsured or may choose a short-term health plan creating financial risk.
These problems can be rectified by changes in the rules governing HSAs and HDHPs and the creation of additional financial incentives.
Potential Policy Responses:
Three policy changes designed to mitigate problems associated with HDHPs and HSAs are proposed and discussed. Potential modifications include:
- A refundable tax credit for HSA contributions,
- Expanded eligibility for HSA contributions for additional cost-sharing insurance plans,
- Regulations expanding pre-deductible insurance payments for some prescription drugs
These potential modifications are discussed in turn.
Tax Credit:
The current HSA subsidy allowing deductibility of contributions is more generous for households with high marginal tax rates. There are multiple ways to modify the tax treatment of HSA contributions to augment and stimulate contributions to HSA plans by lower-income or middle-income households.
A refundable tax credit of $2,000 for HSA contributions up to $2,000 combined with the elimination of the tax-deductibility of HSA contributions would eliminate the disparity in benefits from HSAs across income groups. The tax credit would cause other beneficial outcomes:
- The increase in HSA contributions for low-income households would assist people most likely to have payment problems due to medical expenses.
- The tax credit, which is only available for people with comprehensive private insurance, could reduce the number of people choosing to go uninsured or choosing Medicaid over private insurance.
- The proposed tax credit, if it did not vary with income, would not discourage work.
The economic impacts of the final tax credit depend on the details of the proposal and could impact and be impacted by other tax credits in existence and under consideration.
A tax credit for HSA contributions could be enacted through by majority vote through the tax reconciliation process.
Alteration of Eligibility Requirement for HSA Contributions:
Current tax law restricts HSA contributions to people with a qualified HDHP. The proposed change to tax law would allow HSA contributions for people with high-coinsurance rates even if the plan had a modest deductible.
Health plans with high coinsurance rates are an effective and equitable cost-sharing mechanism.
People with high coinsurance rates and low deductible retain a partial incentive to economize on health expenditures even after the deductible has been met. By contrast, people with a high deductible and a 0% coinsurance rate lose the incentive to economize on health as soon as the deductible is met.
High deductible health plans do have one important advantage. High deductibles are a highly effective way to reduce premiums and generally the high-deductible plan has a lower premium than the high-coinsurance-rate plan.
A high deductible health plan makes it extremely difficult to pay for health services until the deductible is met leading to possible bad health outcomes.
The choice of health insurance plan often depends on who pays the premium. Households gravitate towards the more expensive plan if premiums are paid by an employer or through a government subsidy and the less expensive plan when they make premium payments.
This change like the proposed premium tax credit could be enacted by majority vote through the tax reconciliation process.
Modification of regulations on HDHP reimbursement for some prescription drugs:
There is substantially variability in health insurance reimbursements for prescription drugs.
Some comprehensive low-deductible health plans make partial reimbursements for certain medicines even prior to the customer meeting her deductible.
Many high-deductible health plans do not reimburse any prescription drug costs until health expenditures reach the deductible.
The lack of reimbursement for prescription drugs until the deductible is satisfied causes some households to forego prescribe medicines. The failure to take prescribed medicines for chronic conditions like diabetes can lead to kidney problems, eye problems, amputation, and heart issues.
A regulation classifying certain medicines as preventive medicines that are exempt from high deductibles under HDHP would reduce incentives for people with chronic health conditions to forego necessary prescriptions. The Department of Health and Human Services could mandate coverage for some prescriptions treating chronic diseases as a preventive method under current regulations.
Financial Impacts:
The proposed modifications to HSA and HDHP rules impact the premiums paid for health insurance plans, tax revenue received by the government, and taxes paid by households.
The proposed tax credit for HSA contributions would increase demand for HDHPs by lower-income lower-marginal-tax rate households. The shift in preferences towards HDHPs would reduce premiums and reduce the tax expenditures for insurance purchases in both the state-exchange and employer-based markets.
The cost to the Treasury of the new tax credit for HSA contributions would be partially offset by a decrease in Treasury subsidies on health insurance premiums. The elimination of deductibility of HSA contributions would also partially offset costs stemming from the new tax credit.
The proposed changes in rules governing insurance company reimbursements for drug payments would result in a modest increase in insurance premiums for HDHPs. The change might increase demand for HDHPs, which could lower average premium payments since HDHPs would still be less expensive than low deductible plans.
Concluding Remarks:
The proposed changes to rules governing HSAs and HDHPs are beneficial for several reasons. The changes reduce financial risks associated with high out-of-pocket costs, reduce incentives for people to forego necessary medical treatments and may incentivize some health people to retain comprehensive health insurance.
The plans proposed here reduce out-of-pocket costs both for people insured in state-exchange and employer-based insurance markets. By contrast, many of the reforms implemented by the Biden Administration and by Congress, including changes to the premium tax credit, the use of gold plans as a default, and cost-sharing subsidies only address problems in the state-exchange market.